What decisions has the Commission taken today as regards the Excessive Deficit Procedure?

Today, the Commission is issuing an opinion, proposing to the Council of Ministers to decide that an excessive deficit exists in Croatia.

The Commission is also issuing a recommendation for the Council to decide on the proposed adjustment path and budgetary targets in order for Croatia to correct the excessive deficit and ensure that the country's deficit and debt are brought back into line with the requirements of the EU Treaty.

Today's opinion is based on the Commission's report published under Article 126 (3) of the EU Treaty on 15 November showing that neither the deficit nor the debt criterion of the Treaty are fulfilled. Following the identification of these breaches, the Commission is of the opinion that an Excessive Deficit Procedure (EDP) should be opened for Croatia.

Why is the Commission recommending that the Council open an EDP for Croatia?

According to notified data, Croatia's general government deficit reached 5% of GDP in 2012, and total government debt amounted to 55.5% of GDP. In the draft 2014 budget adopted on 4 December, the Croatian Government envisages that the deficit will stay above 3% of GDP over the entire period 2013-2016. In the update of the Commission's Autumn Economic Forecast, which incorporates information that became available since its publication and consitutes the baseline scenario for the Commission recommendation to correct the excessive deficit, on current policies the deficit will increase to 5.4% of GDP in 2013 and 6.4% of GDP in 2014.

On general government debt developments, according to the government's expectations, the debt-to-GDP ratio would increase to 62% in 2014 and rise further in 2015 and 2016. In the update of the Commission's Autumn Economic Forecast, the debt ratio will already rise above the 60% of GDP threshold in 2013, increasing further in 2014 and 2015. In the light of this, the Commission recommends that the Council decides on the existence of an excessive deficit in accordance with Article 126(6) of the EU Treaty.

When should Croatia correct its excessive deficit?

The Commission recommends to end the present excessive deficit situation by 2016 and defines intermediate budgetary targets to achieve this. Accordingly, the Commission proposes that the Council of Ministers addresses a Council Recommendation to Croatia under Article 126(7) of the EU Treaty, and following the adjustment path proposed. Specifically, Croatia should reach a headline deficit target of 4.6% of GDP for 2014, 3.5% of GDP for 2015 and 2.7% of GDP in 2016, which is consistent with an annual improvement of the structural balance (the deficit adjusted for the cycle and one-off operations) of 0.5% of GDP in 2014, 0.9% of GDP in 2015 and 0.7% of GDP in 2016. This adjustment path would help bring the deficit below the 3% of GDP reference value by 2016 while, at the same time, ensuring that the debt ratio approaches the 60%-of-GDP reference value at a satisfactory pace.

Why is the Commission proposing that Croatia corrects its excessive deficit by 2016?

According to Regulation 1467/971, the correction of the excessive deficit should be completed in the year following its identification (which would mean by 2015 in this case, since the Council is expected to take the relevant decisions in January 2014), unless there are special circumstances.

Longer deadlines can be set in the case of EDP based on the debt criterion, when the government deficit requested to comply with the debt criterion is significantly lower than 3% of GDP. In order to correct the excessive deficit by 2015, and ensure joint compliance with the debt reduction benchmark, the required structural effort would be very large. The adjustment path recommended by the Commission aims to strike a balance between the need to take into account the weak economic conditions and the urgency of the fiscal adjustment to instil credibility in the consolidation effort. The EDP scenario implies a correction of the excessive deficit with respect to both the deficit and debt criteria by 2016. This longer adjustment path will enable Croatia to pursue much-needed structural reforms in parallel with fiscal consolidation, addressing weak growth.

What are the next steps?

EU Finance Ministers are likely to discuss today's Recommendations at the ECOFIN Council meeting on 28 January 2014 with a view to issuing a Council Recommendation to correct the excessive deficit and bring the debt path in line with what is required. The Commission recommends that the Council sets a deadline of 30 April 2014 for Croatia to take effective action (i.e. to publicly announce or take measures that are sufficient to ensure adequate progress towards the correction of the excessive deficit) and to report in detail on the consolidation strategy it foresees to achieve the respective targets.